Soaring personal debt, out-of-whack house prices and the maturity of the first batch of SSIAs will all make for a volatile mixture, says John McManus

The past 12 months have seen the economy driven along by the twin forces of consumer spending and the construction sector. The corollary of this has been soaring levels of personal debt and the relentless march of property prices.

Next year will see these trends continue and, when you throw in the impact of part of the €16 billion locked up in Special Savings Incentive Accounts coming on stream, you have a fairly volatile mixture.

Warning signals have already been sounded, most recently by the Economic and Social Research Institute in its medium term review. As well as the economy's dependence on construction activity - which now accounts for 14 per cent of economic growth - the ESRI also honed in on the complacency bred by 10 years of strong growth. This "apparent insouciance" about the future is driving borrowing and may be storing up trouble.

Similar sentiments are likely to be expressed by the Organisation for Economic Co-operation and Development (OECD) when it publishes its biennial country review of Ireland early next year. The OECD believes property prices are 15 per cent overvalued, according to internal documents. More significantly the Central Bank does not disagree, the same documents contend.

It will be interesting to see if the OECD report has any impact on the property market. The litany of warnings emanating from the ESRI and others - not to mention the first rise in interest rates in five years - did little to check property prices which finished strongly, up 8 per cent in the year to the end of November and were expected to finish up 9 per cent for the 12 months.

The outlook for the construction sector remains strong. The ending of tax relief for car parks and other property investments - albeit on a a phased basis - will be more than compensated for by the huge infrastructural spend envisioned under the Transport 21 plan unveiled this year.

The relatively benign outlook for the economy will form the backdrop for the negotiation of the new national wage agreement in the new year. The opening act of this drama was played out in the closing weeks of 2005 when attempts by Irish Ferries, part of the Irish Continental Group, to restructure its Irish Sea operations sparked one of the most ugly industrial disputes of recent years.

Siptu seized upon Irish Ferries' plan to replace its existing crew with contract staff from Eastern Europe to highlight the growing issue of job displacement.A deal was hammered out and job displacement will be on the agenda in the coming pay talks. But the Irish Ferries dispute has dissipated much emotion on both sides and progress towards an agreement may well be swift.

A new round of benchmarking will figure in the agreement and could well prove a sticking point. The National Economic & Social Council strategy report was frank about the problems with the previous benchmarking round that granted average pay rises of 8.9 per cent for pubic servants. It accepts that there is a need to build public confidence in benchmarking as a way of improving performance in the public sector. Squaring that circle will prove difficult.

Practical solutions to the job displacement issue will also be hard to find, given the economy's huge appetite for migrant workers, with net migration running at around 50,000 a year. Fás, the state training agency, proposed the introduction of a wage insurance scheme to soften the blow for displaced workers, but the initial reaction from the Government is tepid.

Aside from the new national agreement, the other big issue on ministers desks will be pension reform. There had been an expectation that something would be done in the December Budget, but it did not transpire. Séamus Brennan, the Minister for Social and Family Affairs plans to publish a review carried out by the Pensions Board in January.

The contents of the report have been well ventilated at this stage and Brennan and Minister for Finance Brian Cowen have yet to agree a way forward.

There is a fair wind behind the Pension Board proposal that the Government should switch its incentives from tax relief to matching funding, along the lines of the SSIA products. However, the Department of Finance is believed to have baulked at the second part of the proposal which is that the matched funding should be on a one for one basis, which would have the same impact as offering tax relief at the marginal (42 per cent) rate on all pension contributions. The two ministers clearly have some work to do in order to have something ready for the Social Welfare Bill in the spring.

Before the Social Welfare Bill comes the Finance Bill, which gives effect to the measures announced in the Budget. It is expected to row back quite significantly on the changes to the remittance system, under which people employed here by foreign companies only pay tax on that part of their salary which they "remit" here.

The abolition of the system, which was a response to the sort of abuses exposed at construction firm Gama earlier this year, will also have an impact on highly paid executives transferring here from abroad.

The extent to which the State will bend to accommodate inward investment was highlighted by revelations about the tax structures employed by Microsoft and Google amongst others. It emerged that, by establishing operations in Ireland, Google has cut its average tax bill from 39 per cent to 31 per cent, while Microsoft was shaving $500 million of its tax bill in a similar fashion.

The revelations put flesh on the bones of the often voiced statement that tax was and is the main driver of inward investment.

The projects in the pipeline for announcement in the new year include Amgen, one of the world's largest biopharmaceutical companies, which is due to invest €1.3 million in a manufacturing plant in Carrigtohill in Co Cork, creating hundreds of jobs.

Notwithstanding the usual caveats about the vulnerability of the Irish economy to external forces, the Amgen announcement will herald the start of another good year.